The lawsuit claims
plan fiduciaries engaged in the imprudent and disloyal exercise of
their discretionary fiduciary authority over the plan to include
Schwab’s own affiliated investment products as investment options within
the plan and sale of their own services to the plan. The complaint
alleges that defendants “reaped significant fees and profits at the
expense of the plan and its participants.”

In a statement to PLANADVISER, Charles Schwab said, “It’s our practice not to comment on
pending litigation. However, we intend to vigorously defend against this
case, and believe it is totally without merit. We are committed to
helping employees save for retirement by providing a 401(k) plan with
low-cost investment products and independent personalized advice.”

At
issue in the case are several types of Schwab Affiliated Products and
Services, categorized as: the “Affiliated Funds,” the “Schwab Savings
Account,” the “Self-Directed Brokerage,” and the “Interest Free Loan
from Unallocated Plan Cash.”

The lawsuit accuses plan fiduciaries
of making no meaningful investigation into whether these Schwab
Affiliated Products and Services were prudent for the plan, or whether
alternative funds offered by other providers would be more appropriate,
cost effective or better performing. Instead, the complaint says they
“imprudently and disloyally elected to provide the Schwab Affiliated
Products and Services to the Plan in an effort to generate fees for the
Schwab Entity Defendants at the expense of the Plan and its
participants.” The lawsuit says the fees were excessive, unreasonable
and far exceeded the real costs associated with administering the plan.

The
compliant pointed out a 3 to 5 basis point difference in fees between
the Schwab S&P 500 Index Fund and the other S&P 500 Index funds.
It said while that “may seem small at first glance, the plan had more
than $100 million invested in the Schwab S&P 500 Index Fund each
year during the class period, meaning the plan paid hundreds of
thousands of dollars in fees more to Schwab than it would have paid to
other fund providers even when not compounded.”

The lawsuit noted
that since 2011, the fees for Schwab’s S&P 500 Index Fund have
remained the same, while the fees for many of its competitors’ S&P
500 index funds have declined. In addition, other new S&P 500 index
funds are now offered with lower fees than charged by the Schwab S&P
500 Index Fund. “Thus by 2015, numerous S&P 500 index funds with
lower costs and better performance than the Schwab S&P 500 Index
Fund were available on the market,” the complaint says.

NEXT: TDFs and stable value fund called out

The lawsuit also says that during
the class period, the defendants included seven other Schwab mutual
funds, ten Schwab target-date funds, a Schwab stable value fund, a
Schwab money market fund, and a Schwab savings account as investment
options. It says that like the Schwab S&P 500 Index Fund, many of
the other Schwab affiliated funds had higher fees and worse performance
than comparable funds from other providers. By year-end 2015, more than
$500 million in plan assets were invested in these Schwab affiliated
funds.

The complaint specifically calls out the Schwab Managed
Retirement Trust Funds or target-date funds, noting that the Vanguard
Target Retirement Funds target-date series had fees more than 80% lower
than the Schwab Managed Retirement Trust Funds, and materially
outperformed the Schwab funds during the years leading up to the start
of the class period.

In 2014, the Schwab defendants replaced the
Stable Advantage Money Fund with a Schwab Bank Savings Cash account as
an investment option in the plan. According to the lawsuit, the Schwab
Savings Account is a demand deposit account at defendant CSBank that
pays accountholders interest equivalent to money market rates. The
lawsuit sites reports that show stable value funds are conservatively
managed to preserve principal and provide a stable credit rate of
interest, and because they hold longer-duration instruments, they
generally outperform money market funds, which invest exclusively in
short-term securities. The Schwab retirement plan fiduciaries are
accused of making no meaningful investigation into the merits of
including a higher yielding stable value fund offered by another company
in lieu of or in addition to the Schwab Stable Value Fund, the Schwab
Value Advantage Money Fund, or the Schwab Savings Account, either at the
time those investment options were added or on an ongoing basis as part
of periodic review of the plan’s portfolio.

NEXT: Self-Directed Brokerage Account fees and use of unallocated cash

According to the complaint, Schwab
and its affiliates collected fees from several sources arising out of
the plan’s participation in Schwab’s Self-Directed Brokerage Account,
including transaction fees and commissions and other fees to individual
plan participants who opened Self-Directed Brokerage accounts through
the plan. The lawsuit also notes that the complexity and confusing fee
schedule make this option non-optimal for less sophisticated investors,
but Schwab offered it to all participants. Schwab is accused of not
investigating whether a self-directed brokerage account offered by
another company would have been a better option for the plan than
Schwab’s own and of not investigating whether it would have been more
appropriate to forgo offering any sort of self-directed brokerage
account at all. The defendants are accused of including the account for
no other reason than to generate fees for the Schwab defendants at the
expense of the plan’s participants.

Finally, the lawsuit calls
out Schwab for using unallocated plan cash from new contributions, other
assets awaiting investment, and from pending distributions and
rollovers for their own benefit. Defendant CSBank, as the plan’s
trustee, held the unallocated plan cash in accounts in the plan’s name.
The plan’s fiduciaries exercised their discretionary authority to give
CSBank discretionary authority to invest the unallocated plan cash and
retain as compensation for its services any credit, interest or other
earnings it achieved on its investments. The lawsuit calls this an
interest free loan to CSBank. Schwab is accused of not investigating
whether the unallocated plan cash could be used in a different way that
benefitted the plan or its participants.

The lawsuit asks that
defendants make good to the plan the losses their fiduciary breaches,
co-fiduciary breaches and/or prohibited transactions caused the plan;
disgorge to the plan any and all property they hold as a result of the
fiduciary breaches, co-fiduciary breaches and/or prohibited transactions
that in good conscience belongs to the plan, the proceeds of such
property to the extent it has been disposed of, and any profits
defendants received as a result of holding such property; and provide a
full accounting of all fees paid, directly or indirectly, by the plan to
the defendants.